Businesses gain much-needed flexibility to bring in more products duty-free, but confusion on what rules actually apply run supreme argues Arne Mielken of Customs Manager Ltd.
It can be quite challenging to find the correct commodity code (or HS code) of complex products and items. But these are essential to find out if the business’ product meets the so-called Rules of Origin contained within a Free Trade Agreement (FTA). Many countries have signed such trade agreements amongst each other, creating a complex web of trade agreements between nations.
It’s complex
For example, the EU, consisting of 27 Member States has a deal with the EFTA States (Switzerland, Norway, Iceland and Liechtenstein), once through the European Economic Area and a separate trade agreement with Switzerland. The EU has another individual trade agreement with the Faroe Islands, Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Palestine, Syria and Tunisia. Some of these are many years old, others are quite modern. Turkey has a trade agreement with the EU AND is part of a duty-free Customs Union for part of their products. Then there is Albania, Bosnia and Herzegovina, the Republic of North Macedonia, Montenegro, Serbia and Kosovo and the Republic of Moldova. They are all connected to the EU via Free Trade Agreements with different levels of ambitions.
A Spaghetti bowl
Now, most of these countries have also agreements amongst each other, creating a unique spaghetti bowl effect and nobody knows anymore what is agreed between what country. Clear is, where there is an FTA, there are also rules of origin. Each FTA has their so-called product-specific rules or “list criteria” they agree amongst each other to be eligible for duty-free treatment.
Enter the PEM Convention
In an effort to bring a little of order into the chaos and to allow for businesses to source their raw materials from more and more countries, the countries agreed to harmonize their rules of origin, the list rules or product-specific rules. Instead of different ones, they agreed to have the same ones. In legal speak, the protocols of rules of origin in FTAs between “Parties to the pan-Euro-Med zone” were (and continue to be) being replaced by a single set of rules of origin laid down, known as the PEM Convention (formally the Regional Convention on pan-Euro-Mediterranean preferential rules of origin).
Its’s magic!
The PEM Convention aims to ultimately replace the network of about 60 bilateral protocols on rules of origin in force in the pan-Euro-Med zone with a single legal instrument.
What’s even better is that if all the product-specific rules of origin are the same from Egypt to Iceland, then this gives businesses unparalleled opportunities to source more raw material or ingredients from more countries at the preferential duty rate, often zero! If you meet the rules of origin in the Faroe Islands, you meet them in North Macedonia as well! Good news.
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Cumulation
In practice, businesses can cumulate the origin of products. A fabric that requires two different production processes that can still originate under a trade agreement even if these production processes have been carried out in more than one country (and where that country is not part of the agreement considered).
This Pan-Euro-Med system of cumulation of origin creates a single zone in which so-called “diagonal cumulation can apply. This step offers new trade opportunities.
Detail
To be more specific, this means that Ingredients or raw materials which have obtained originating status in country 1 may be used in products manufactured in country 2 without those products losing their originating status when exported to country 3 within the pan-Euro-Med zone. Normally, only the parties in the agreement could trade under preference, so country 3 and country 2, but not county 1. Here, as all the rules of origin are the same, they can. This is Diagonal cumulation. However, this obviously only applies if an FTA is in place between all countries concerned.
Modernize!
On 27 November 2019, the group of countries under PEM revised the joined rules of origin of the PEM Convention.
Some countries wanted to start applying the new rules almost right away:
Bosnia and Herzegovina,
the European Union,
Georgia,
Iceland,
Israel,
Jordan,
Kosovo,
Lebanon,
Moldova,
Montenegro,
North Macedonia,
Norway,
Switzerland,
Serbia,
Turkey,
Ukraine,
European Free Trade Association (EFTA) and
the countries of the Central European Free Trade Agreement (CEFTA).
Alternative rules will also apply
These new rules apply as rules alternative to those of the PEM Convention for those countries since 1 September 20201.
Their application is optional:
either by businesses from the countries that have introduced the revised rules into the bilateral protocols. This means these businesses will be able to claim preferential treatment on the basis of these revised rules, or
businesses can apply the current rules of the PEM Convention, depending on their business needs and preferences.
The former rules also apply
To be clear former rules will, however, continue to be in full application among all PEM countries, too, as done currently. The rules will be applied in a transitional way, pending the adoption of the revision of the PEM Convention.
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